Woolworths Group (WOW) announced the much-anticipated sale of its petrol business to European and North American convenience and fuel retailer EG Group for $1.725 billion(¥189,750,000,000). Ord Minnett derives a pro-forma FY19E enterprise value to operating earnings (EV/EBITDA) transaction multiple of 6.8x, in line with or above recent similar transactions and so we see this acquisition as EPS-dilutive. There is little tax to be paid on the sale due to carried-forward losses from its now-closed hardware business, and so proceeds from the acquisition are expected to be used in capital management, which should moderate forecast EPS dilution.
This divestment further indicates Woolworths’ focus on its core food business. We maintain our Hold recommendation and our $30.00(¥3,300) target price.

Lendlease Group (LLC) has found further underperformance in its engineering and services (E&S) division from “predominantly a small number of projects previously identified”, resulting in the property developer and construction group taking a $350 million(¥38,500,000,000) impairment charge in its first-half FY19 accounts. In Ord Minnett’s view, however, the implications extend beyond the FY19 impairment with the following potential effects:
1. The likely sale of the E&S business;
2. Dilution to earnings and dividends associated with the E&S exit;
3. Upward pressure on gearing – potentially, one or more of Lendlease’s credit ratings may be revised down;
4. The businesses has limited capacity to absorb another major impairment without affecting available capital for development.
On the positive side, Lendlease still has low gearing (circa 8%), ample liquidity (undrawn facilities of $1.8 billion(¥198,000,000,000)) and will potentially be able to stabilise its E&S business. Despite this and Friday’s 18.3% slide, we caution against buying. Lendlease shares at current levels as sizeable risks remain. We maintain our Hold recommendation on Lendlease but cut our target price to $16.00(¥1,760) from $18.50(¥1,980).

One of Transurban Group’s (TCL) key contractors, Lendlease Group (LLC, Hold), announced “further underperformance in the financial position of its Engineering and Services Business”. It identified a “small number of projects” that have been problematic including NorthConnex, in which Transurban has a 50% interest. As a result, Lendlease flagged it would take a $350 million(¥38,500,000,000) charge against its engineering and services division in its first-half FY19 result. The company cited the impact of wet weather on some projects, remedial work on defective designs and lower productivity in the post-tunnelling phase of Sydney’s NorthConnex project for the division’s underperformance. We maintain our Buy recommendation on Transurban with a $13.25(¥1,430) target price.

The Australian Securities and Investments Commission (ASIC) made a submission to the Royal Commission on Financial Services recommending the removal of commissions for all insurance products.
In Ord Minnett’s view, if this recommendation ultimately works its way into legislation, it will affect the Steadfast Group (SDF) business model adversely, which leads us to lower our recommendation to Hold from Accumulate and our target price to $2.88(¥220) from $3.35(¥330).

Morgans Research

Woolworths Group Ltd (A$29.42(¥3,190)) HOLD TP A$29.06(¥3,190) Petrol business finds another buyer. WOW has announced the sale of its petrol business to EG Group for A$1.725(¥110)bn. We estimate the deal represents an FY19F EV/EBIT multiple of ~8.5x, which is a fair price in our view relative to listed peers Viva Energy (8.7x) and Caltex (8.9x). We make no changes to earnings forecasts and maintain our Hold rating on a higher A$29.06(¥3,190) target price (from A$27.64(¥2,970)). We see the deal as positive for WOW after a two-year long sale process.

Aventus Group (A$2.05(¥220)) ADD TP A$2.28(¥220) Internalisation complete. AVN recently internalised its management with the deal funded via new securities and debt from existing facilities. FY19 FFO guidance is now 18.4c (from 18.2c) and NTA decreases from A$2.38(¥220) to A$2.10(¥220) (given intangibles) although NAV is broadly flat at around A$2.37(¥220). We retain our Add rating with a revised price target of A$2.28(¥220). Post recent price weakness the stock offers an attractive distribution yield of +8% paid quarterly

Deutsche Bank Research

Woolworths – Goodbye Petrol, hello capital management {Ticker: WOW.AX, Closing Price: 29.35 AUD, Target Price: 31.00 AUD, Recommendation: Buy}. A good outcome given the tough conditions. Capital management likely – After a protracted process beginning in 2016, Woolworths will soon successfully exit Petrol. The price achieved implies a relatively low multiple but is only slightly below the original deal struck with BP which is a reasonable outcome given the weak share prices of the listed refiner/marketers and the tough trading conditions with majors losing share to independents and risks around retail fuel margins. The deal offers other benefits for Woolworths – the fuel discount offer and Rewards will continue, and Woolworths will benefit from wholesale supply. We expect a net cash position creating an opportunity to distribute capital and release some of the $2.6(¥220)b franking credit balance. Buy.

Aristocrat Leisure – SciGames 3Q18 result positive for Aristocrat {Ticker: ALL.AX, Closing Price: 27.13 AUD, Target Price: 41.45 AUD, Recommendation: Buy}. DB view – We view SciGames’ broadly in-line 3Q18 result as supportive of our thesis that the North American gaming market remains stable and that Aristocrat is continuing to gain market share. SciGames’ Gaming earnings increased by 5% on a revenue decline of 1% with R&D down 11% and SG&A costs down 10%. Gaming Ops revenue declined by 10%, Gaming Machine revenue was up 3% while Systems revenue was up 12%. The Gaming Ops installed base declined by 1,554 units sequentially as the company converted leased units to sales in OK and ARPU was down 2%. Unit sales were up 1% to 7,663 and ASP was up 3%. The share price was up 25% as the company announced that it would consider a sale of a minority interest in its social gaming business via an IPO in order to pay down debt. We retain our Buy rating on Aristocrat ahead of the result at the end of the month.

Dexus Group – Dexus Perth Investor Day {Ticker: DXS.AX, Closing Price: 9.98 AUD, Target Price: 10.50 AUD, Recommendation: Hold}. Perth Property Tour – Dexus hosted an Investor day in Perth this week, which included site visits to office assets; 240 St Georges Terrace, 58 Mounts Bay Road and Kings Square and DWPF’s retail asset Carillon City. Dexus, which currently owns 3 Perth office assets (representing 6% of the total Office portfolio), believes the Perth Office market has bottomed and is forecasting 2 – 4% effective rental growth going forward. The assumptions have been supported by: 1) limited office supply until 2023; and 2) a mining employment growth recovery. In addition, management believes there is a potential for valuation gains going forward, noting that assets are currently being sold 30% below replacement cost.

Caltex Australia – When I grow up I want to be a retailer. Initiate with Hold rating {Ticker: CTX.AX, Closing Price: 27.15 AUD, Target Price: 29.00 AUD, Recommendation: Hold} – Embarking on the second stage of transformation – Management has done a good job of transforming the F&I business post Chevron’s exit – Kurnell has been converted to a terminal, in-house trading & shipping capability has been instituted and supply into offshore markets been established. Transformation of the retail operations is underway in an effort to capture more non-fuel sales through the new format rollout. The partnership with Woolworths reduces risk and we believe there is opportunity to expand retail earnings but the sales uplift required to achieve Management’s target is optimistic in our view and we see additional risk around corporatising franchised sites, compounded by the potential for fuel margin pressure. Hold.

James Hardie Industries – 2QFY19 Result: Keeping the faith {Ticker: JHX.AX, Closing Price: 16.90 AUD, Target Price: 20.00 AUD, Recommendation: Buy}. Q2FY19 NPAT in line with DBe but outlook disappoints – James Hardie’s Q2FY19 NPAT of US$81(¥8,910)m was in line with DBe of US$78(¥8,580)m. However, while volume growth was reasonable (8% exteriors), recovery in PDG remains slower than we expected and freight and input costs continue to pose a headwind in the near term (US$50(¥5,500)-60m in FY19). While input prices (particularly pulp) remain close to peak, we expect the margin impact of these to normalise as JHX continues to achieve solid price growth. We continue to rate JHX a Buy given: 1) US housing market growth expected to continue (albeit at a reduced pace); 2) PDG to potentially recover into FY20; 3) 18% upside to the current share price.

Goodman Group – 1Q19 Update; Growth momentum continues, however already priced in {Ticker: GMG.AX, Closing Price: 10.18 AUD, Target Price: 9.78 AUD, Recommendation: Hold}. 1Q19 Operational Update – GMG released its 1Q19 operational update today, reaffirming its FY19 OEPS guidance of 50.0cps +7% vs pcp (DBe 50.5cps, consensus 50.3cps). Overall, today’s update reiterated GMG’s strong growth potential with 1) improvement to LFL NPI growth; 2) solid AUM growth; and 3) ability to maintain stable development WIP despite flight to quality. Although we believe GMG will continue to grow above through cycle levels in the medium term (we forecast 8%+ p.a growth over the next 3 years), we believe this has already been priced in. We note GMG trades at a 20X PE multiple and at a 2.2X premium to NTA, significantly above the sector average. Hold maintained on valuation.

Whitehaven Coal – Join the buyback club …Increase TP post site visit {Ticker: WHC.AX, Closing Price: 4.96 AUD, Target Price: 6.20 AUD, Recommendation: Buy}. We visited the flagship operations Narrabi and Maules Creek. We update our forecasts for what we learnt which also complements our learnings from Glencore and China meetings.

Sims Metal Management – AGM: Q1 marginally better, but risk remains {Ticker: SGM.AX, Closing Price: 13.25 AUD, Target Price: 12.50 AUD, Recommendation: Hold}. Q1 EBIT at the upper end of the guidance range – Sims held its AGM today. Management noted that underlying EBIT for Q1FY19 was at the upper end of the recent guidance range provided of $58(¥6,380)-63m (DBe 1HFY19 EBIT of $123(¥13,530)m). FY19 guidance was also provided for.

Rhipe – CSP momentum accelerates over 1Q19 {Ticker: RHP.AX, Closing Price: 1.30 AUD, Target Price: 1.75 AUD, Recommendation: Buy}. Maintain Buy, PT increases to $1.75(¥110) – RHP has upgraded its operating profit guidance for FY19 on the back of a strong start to the year. This has largely been driven by continued acceleration in sales momentum from RHP’s CSP channels (O365 and Azure). As outlined in our recent initiation (refer to Ripe for the picking) we are attracted to RHP’s leverage to the accelerated adoption of productivity SaaS (O365) and public cloud (Azure). In addition, RHP has an attractive business model, robust earnings growth potential and exposure to a sector ripe for consolidation

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Deutsche Bank Research

BHP – 15% (plus tax rebate) harvest
BHP – Ticker: BHP.AX, Closing Price: 33.11 AUD, Target Price: 36.00 AUD, Recommendation: Hold. We view BHP’s A$10.4(¥1,100)bn returns program as particularly friendly to Australian shareholders given the tax component on both legs. A 50/50 off-market buyback in Australia to commence immediately and then special dividend applicable to all shares on issue in January 2019 post the buyback, should most broadly satisfy holders. Within this note we have updated our model and NPV to reflect the announced proceedings.

ANZ – 2H18 result – in line at underlying level
ANZ – Ticker: ANZ.AX, Closing Price: 25.93 AUD, Target Price: 29.00 AUD, Recommendation: Hold. 2H18 cash NPAT better than forecast, in line at underlying levelANZ’s 2H18 cash NPAT of $2,994(¥329,340)m was ~2% above our forecast, though pre-provision profit was in line. The low BDD charge was the key driver of the beat at the bottom line. Operationally, the NIM was slightly weaker (-4bps hoh on normalised basis), but this was offset by a stronger OOI outcome. One of the key features of this result was the outperformance of the Institutional division whilst the Australia division underperformed, reflecting the headwinds facing domestic retail banking. Looking forward, continued cost control could provide upside if the group delivers on its goal to reduce its cost base. With ANZ trading at a 3% premium to its historical PE rel vs majors, HOLD maintained.

National Australia Bank – 2H18 result – cost outlook reiterated
National Australia Bank – Ticker: NAB.AX, Closing Price: 25.21 AUD, Target Price: 30.00 AUD, Recommendation: Buy. 2H18 cash NPAT was slightly below our forecasts, but some positives NAB’s 2H18 result was a slight miss against our expectations, with cash NPAT ~2% lower than our forecast. However we saw several positives in this result. While the margin decline of 3bps was slightly worse than we expected, the underlying margin decline was only 1bp, a decent outcome. The group also delivered cost growth within guidance, and reiterated a flat outlook for the next two years. The capital position was slightly ahead, with the CET1 trajectory looking a little more comfortable. Similar to ANZ, the result showed retail banking faces a tough environment, and NAB’s business franchise was a strength. Maintain Buy.

Woolworths – 1Q just a singultus. Well positioned for Christmas quarter
Woolworths – Ticker: WOW.AX, Closing Price: 28.43 AUD, Target Price: 31.00 AUD, Recommendation: Buy. Confirmation of improved sales post Little Shop & Plastic bags welcome news Our recent proprietary survey (refer FITT – 3rd Annual Battle for Baskets Survey – Woolworths hasn’t lost is mojo) left us comfortable that Woolworths will resume its sales outperformance. The better than expected 1Q result and confirmation of accelerating sales suggests the Group recovered from the July/August disruption even quicker than we thought and gives us even more confidence. Woolworths is well positioned to execute well over the key Christmas period and given it has largely stuck to its plan, it’s continuing to please its customers while Coles is distracted with its demerger. Buy retained.

Sonic Healthcare – Medicover 3Q18 – strong revenue growth in German pathology
Sonic Healthcare – Ticker: SHL.AX, Closing Price: 22.66 AUD, Target Price: 28.10 AUD, Recommendation: Buy. Diagnostic Services impacted by German reimbursement changes Medicover’s (MCOVB, not rated, SEK81.70) 3Q18 result revealed Diagnostic Services organic revenue growth was 13.5% and test volumes increased 7.8%. Management noted the German reimbursement changes that were introduced in 2Q18 continued to have an impact on reducing public referrals from doctors in this quarter. However the impact continued to be mitigated to a certain degree by higher volumes of privately paid and private insured referrals.

Aristocrat Leisure – IGT 3Q18 result positive for Aristocrat
Aristocrat Leisure – Ticker: ALL.AX, Closing Price: 27.21 AUD, Target Price: 41.45 AUD, Recommendation: Buy. DB view We view IGT’s 3Q18 as supportive of our thesis that the North American gaming market remains stable and that Aristocrat is continuing to gain market share. IGT’s North American Gaming & Interactive earnings declined by 33% on a 12% decline in revenue (5% underlying). Earnings were impacted by a strong comp, higher depreciation expense and jackpot timing. The Gaming Ops installed base increased by 6 units sequentially, however, yields declined by 2% while unit sales were up 7% with replacement sales up 4.5%. We retain our Buy rating on Aristocrat.

Crown Resorts – Trading update well below expectations
Crown Resorts – Ticker: CWN.AX, Closing Price: 12.26 AUD, Target Price: 12.30 AUD, Recommendation: Hold. Valuation reduced 7% to $12.30(¥1,320)/share; Hold rating maintained We view Crown’s trading update as weaker than expected as main gaming floor revenue was down 0.6%, which was well below our forecast for growth of 2.6%. This was down on a soft comp (+1%) and it lagged the improvement evident in the second half (+2.3%). Non-gaming revenue growth of 3.5% was slightly below our expectations of +3.9% while VIP turnover growth of 13% was slightly ahead of our forecast of +12%. Crown Melbourne was particularly disappointing with main gaming floor revenue flat on pcp and Crown Perth was down ~1.8%. We maintain our Hold rating with the stock trading in line with our valuation of $12.30(¥1,320)/shr and at 20.8x FY19e earnings (10.2x EBITDA).

Star Entertainment Group – Domestic trading update stronger than expected
Star Entertainment – Ticker: SGR.AX, Closing Price: 4.82 AUD, Target Price: 6.20 AUD, Recommendation: Buy. Buy rating and $6.20(¥660)/share valuation maintained We view Star Entertainment Group’s trading update to October 21 to be net positive for the company as domestic revenue growth of +6.7% was well above our forecast of +4.1%, notwithstanding that flat VIP turnover was below our forecast of +19%. The intermediate Sovereign Room has had a strong start with revenue growth above that of the property, and this is primarily volume driven. The domestic comps get easier, however, VIP becomes more challenging. We retain our Buy rating with the stock trading at a 22% discount to our valuation of $6.20(¥660)/share and at 16.2x FY19e earnings. Star is also trading at a 22% discount to Crown.

Lithium market – Is the tide turning on lithium?
Lithium prices show green shoots after EV sales lift in September. Our recent trip through China highlighted the potential for lithium carbonate pricing support into Q4 on i) a lift in auto sales into the end of the year, ii) a reduction in salt lake production in the Qinghai province and iii) reduced output by high cost lepidolite converters and marginal spodumene producers. Since Monday this week, we have seen two price increases: 1) in 99% lithium carbonate to RMB 70,000/t / USD$10,070(¥1,107,700)/t (Figure 3) and 2) in 99.5% lithium carbonate to RMB 80,000/t / US$11,509(¥1,265,990)/t (Figure 4). While the gains are encouraging we expect to see strong EV sales continuing to support lithium demand until the end of the year (for more details see latest Evision Plug 5, page 8). We have BUYS on Orocobre (PT A$6.50(¥660)/sh) and SQM (US$56(¥6,160)/sh).

Ausdrill Limited – Barminco acquisition
Ausdrill Limited – Ticker: ASL.AX, Closing Price: 1.55 AUD, Target Price: 2.00 AUD, Recommendation: Buy. BUY – $2.00(¥220) price target. Due to a change in team structure, we transfer coverage of ASL from Wassim Kisirwani to Ben Brownette with immediate effect. We analyse the Barminco merger and reflect on ASL’s FY18 result.

Rhipe – Ripe for the picking
Rhipe – Ticker: RHP.AX, Closing Price: 1.23 AUD, Target Price: 1.65 AUD, Recommendation: Buy. Leveraged to the cloud, with multiple growth channels – Buy We initiate coverage on RHP with a Buy rating with the stock trading at a 25% discount to our $1.65(¥110) DCF-based PT. Our Buy is predicated upon: (1) RHP’s leverage to accelerating growth in productivity SaaS and cloud adoption; (2) attractive capital-light and cash generative business model; (3) robust earnings growth (forecast 3 yr EPS CAGR 46%); & (4) strong relationship and alignment with the fastest growing cloud platform. Furthermore, RHP has a robust B/S with $23(¥2,530)m of net cash, and presents as an attractive M&A target for global IT distributors.

Morgans Research

Call to action – BHP Billiton Demonstrating genuine care for the interests of its diverse shareholder base, BHP will split the US$10.4(¥1,100)bn proceeds from the ‘shale sale’ between an off-market share buyback and special dividend. This falls in line with our estimate of a 50/50 special/buy-back, as a result no change to our estimates other than to the timing of the buy-back. The final day of eligibility for the buy-back is 5 November, while BHP will trade cum-special dividend until 9 January 2019. This comes on top of the high ordinary dividend we expect BHP to maintain in the short- to medium-term. A great outcome for investors, we maintain our Add recommendation.

Overnight Highlights

US Market: US stocks rose for a third straight day, as industrials gained after President Donald Trump said trade talks with China were “moving along nicely” and healthy results from chipmakers boosted optimism.

European Market: European shares hit a two-week high as strong results from Dutch bank ING and UK telecoms group BT helped offset a disappointing update from Credit Suisse, and ASM International brought some cheer to chipmakers.

Asian Market: The Hong Kong stock market gained grounds on the back of a stronger yuan and policy support for the Chinese economy. Real estate companies lead the advance, but pressure remains on the sector as financing costs rise.

Company Reports

National Aust. Bank (A$25.35(¥2,750)) ADD TP A$31.50(¥3,410) Comforting result NAB has reported. FY18 cash earnings of $5.702(¥550)bn, 0.7% better than our forecast. The composition of the result was broadly in line with our expectations. The final dividend is unchanged at 99cps fully franked, in line with our expectation. Good margin management at the group level is a commendable feature of the result and thus far such discipline has meant that NAB has not needed to increase its variable home loan rates in Australia unlike the other major banks. It is pleasing to see that the Company’s expense targets for the next couple of years are unchanged and the Company appears to be making good progress on its 3-year plan.

Corp Travel Limited (A$22.32(¥2,420)) HOLD TP A$23.30(¥2,530) Strong trading result overshadowed. We are satisfied with CTD’s response to the VGI report and concur that it appeared to contain a number of inaccuracies. Given the complexity of some of the claims, we expect CTD’s response will take time to be fully digested. The VGI report overshadowed a strong trading update by CTD and the potential growth opportunities that lie ahead over coming years. We continue to rate this company and its management team highly. However we maintain a Hold rating given cautious sentiment may outweigh fundamentals in the short term.

Orocobre Limited (A$3.72(¥330)) ADD TP A$5.68(¥550) Record profit margin. US$10,059(¥1,106,490)/t in Sep Q Production at Olaroz (ORE 66.5%) was 2,293t of lithium carbonate (LCE), after a planned (and announced) two-week maintenance shutdown and subsequent production ramp-up, and down from the 3,596t produced in the June 2018 quarter. The Olaroz JV reported revenue of US$32(¥3,520)m (US$44(¥4,840)m previously) for the quarter with the lower tonnage sold. The average received price was US$14,699(¥1,616,890)/t FOB (US$13,653(¥1,501,830)/t previously), a margin of US$10,059(¥1,106,490)/t (US$9,853(¥1,083,830)/t previously). We have modelled production for FY’18/19 to 15,000t of LCE, an average of 4,236t for each remaining quarter. We have factored in the Argentinian tax rate of 35% in perpetuity and assumed the increased export tax remains in perpetuity. Our valuation has decreased to A$5.68(¥550)ps (A$6.35(¥660) previously) and we have eliminated the 10% premium to valuation for our target price of A$5.68(¥550) (A$6.99(¥660) previously).

Woolworths Group Ltd (A$28.70(¥3,080)) HOLD TP A$27.64(¥2,970) Building momentum after a slow start. While WOW’s 1Q19 sales overall were slightly below our expectations, momentum going into Q2 looks solid, particularly in the core Australian Food business. LFL sales growth in the core Australian Food business rose 1.8%, which underperformed Coles at 5.1%. Big W was the key positive surprise (LFL sales +2.2%) and builds on some encouraging results over the past 12 months. We make minimal changes to earnings forecasts and maintain our Hold rating on a largely unchanged A$27.64(¥2,970) target price (from A$27.68(¥2,970)).

Smiles Inclusive (A$0.75(¥0)) ADD TP A$1.10(¥110) Slow start disappoints. SIL has released its 1Q19 cashflow report which was below our expectations, highlighting higher integration costs and a lower revenue from a few JVPs. Although disappointing, we view the events as largely one-off and expect SIL to address these issues at the upcoming AGM. In our modelling we have moderated our acquisition assumptions taking a more conservative stance resulting in a lower NPAT forecast by ~15% over the next three years. As a result our target price has been reduced to A$1.10(¥110). Add.

CommBank PERLS XI Capital Notes. Commonwealth Bank of Australia (CBA) is seeking to issue 7.5 million CommBank PERLS XI Capital Notes (CBAPH) at an issue price of $100.00(¥11,000) per security to raise $750 million(¥82,500,000,000) (with the ability to raise more or less). Ability to lock in an issue margin of [3.70 – 3.90]% for an extended period given the term of 5.5 years to the Security’s Call Date. Opportunity for CommBank PERLS VI (CBAPC) holders to re-invest on a priority basis the proceeds of the purchase of their securities into the new PERLS XI Capital Notes Offer. CommBank PERLS XI Capital Notes are Basel III compliant regulatory capital instruments and as such contain Capital and Non-Viability trigger conditions which may in certain circumstances see the value of the Notes fall or the Notes written off.

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Deutsche Bank Research

Healthscope Limited – 1Q trading update and expected value of property assets – Ticker: HSO.AX, Closing Price: 2.10 AUD, Target Price: 2.26 AUD, Recommendation: Hold. 1Q trading update – strong growth off a low base – The Hospitals division achieved operating EBITDA growth of 10.4% in 1Q19 (vs -6.8% in 1Q18). Management noted hospital revenue growth has remained subdued, so we believe the company’s strong double-digit EBITDA growth is mostly attributable to a low comparable base figure, closure of loss-making hospitals and cost savings.

ANZ – 2H18 result – bottom line strong, helped by low BDD – Ticker: ANZ.AX, Closing Price: 25.66 AUD, Target Price: 29.00 AUD, Recommendation: Hold. 2H18 cash NPAT stronger than expected, but underlying profit in line – ANZ’s 2H18 result was strong at the bottom line, with cash NPAT of $2,994(¥329,340)m coming in 2% above our forecast. This was helped by a very low bad debts charge of $280(¥30,800)m, which translated to BDD/GLA of 9bps (DBf 15bps). The pre-provision profit of $4,569(¥502,590)m was in line with our forecast. Overall revenue and expenses were close to expectations, albeit the composition was different. The weak margin outcome was offset by better other operating income. On the positive side, the group’s CET1 ratio of 11.4% was stronger than expected (DBf 11.1%), and asset quality remained benign. The final dividend of 80cps was in line with expectations. Overall, this looks like a sound result at the underlying level, with further support from the low BDD.

Mineral Resources – 1QFY19 First look: Softer shipping in Sep Q as operations turn over – Ticker: MIN.AX, Closing Price: 14.32 AUD, Target Price: 15.50 AUD, Recommendation: Hold. 1Q largely in line but read-through not overly positive for 1H – MIN has reported its Sept Q results. Production was largely in line but shipments were softer at 2,133kt (-30% QoQ) due to the cessation of Carina operations and wind down of DSO shipments from Wodgina.

Retail – September Food CPI – Fresh drives inflation higher – Packaged food posts strong inflation. On a sequential basis ABS food CPI posted Inflation of 0.5%. We focus on year-on-year movement which is more indicative of what retailers will report. On this basis, Food prices inflated by 1.6% (excl. alcohol and tobacco) in the September qtr which was stronger than the 0.3% in the June qtr and above the 12 month average of 0.5%. Packaged grocery prices were up 0.3% which is stronger than the 0.1% in the previous 3 quarters while fresh inflation jumped to 3.1% from 1.1% deflation in June. Our DB Supermarket Inflation Index suggested an improvement in Packaged Goods inflation and a large improvement in Fresh inflation. We believe packaged inflation is a more important driver of food sales given the elasticity in fresh (see DB Supermarket Inflation Index – 1Q19. Fresh drives prices to inflation published 5 Oct 18).

Coca-Cola Amatil – KO result readthrough – Ticker: CCL.AX, Closing Price: 9.66 AUD, Target Price: 8.50 AUD, Recommendation: Sell. The Coca Cola Company impairs its associate in Indonesia – The Coca Cola Company (KO) released its quarterly results for the three and nine months to September 28. The most important readthrough for Amatil came from an impairment that KO recognised against its equity accounted associate. The ‘other-than-temporary’ impairment charge amounts to US$205(¥22,550)m and relates to PT Coca-Cola Bottling Indonesia. The company has said that the impairment was primarily driven off the back of revised projections of future operating results. This was due to unfavorable macroeconomic conditions and an adverse FX movement.

Fortescue Metals – Grade and China’s gross margin – Ticker: FMG.AX, Closing Price: 4.00 AUD, Target Price: 3.70 AUD, Recommendation: Sell. At the time of Q1, we were visiting the customer base in China.

Whitehaven Coal – Riding in Glencore’s slipstream, pushed along by China – Ticker: WHC.AX, Closing Price: 4.85 AUD, Target Price: 6.00 AUD, Recommendation: Buy. We update our views and valuation on WHC for – In China we recently met with power users and coal producers which pointed to continued imports of high energy coal as the Energy Bureau holds up efforts to increase domestic coal production.

Morgans Research

Call to action – ANZ Banking Group ANZ has reported FY18 cash earnings from continuing operations of $6.7(¥660)bn, 0.8% less than we expected on the same basis. A final dividend of 80cps fully franked has been declared in line with our expectation. We believe ANZ’s result does not have any unexpected negative read-throughs for upcoming major bank results. We believe the rough period associated with ANZ’s restructuring and capital portfolio rebalancing is now approaching an end and we expect the next couple of years to be smoother than the last couple of years from this perspective.

Overnight Highlights

US Market: A surge in technology shares following Facebook’s latest earnings lifted US stocks Wednesday, helping major indexes trim some of their October declines following a punishing period for global investors.

European Market: European shares rallied as a tumultuous October drew to a close and strong results from L’Oreal, Sanofi and banks Standard Chartered and Santander soothed investors’ nerves.

Asian Market: Asian stock markets closed higher as Japan held the line on interest rates, and even China marked an advance despite weaker-than-expected manufacturing data.

Company Reports

NIB Holdings Limited (A$5.54(¥550)) ADD TP A$6.49(¥660) Favourable claims tailwinds continuing. NHF has today upgraded FY19 Group Underlying Operating Profit guidance by ~5.5% to at least A$190(¥20,900)m (previously at least A$180(¥19,800)m). The driver of the upgrade continues to be a benign claims environment driven by low industry claims utilisation trends. We upgrade our NHF FY19F/FY20F EPS by 4-7% factoring in revised guidance and lower claims going forward. Our NHF valuation increases to A$6.83(¥660) (price target A$6(¥660).). We move NHF to an ADD recommendation on valuation grounds. We think the recent ~15% fall in NHF’s share price since August is overdone particularly given today’s earnings upgrade.

AMP Limited (A$2.47(¥220)) HOLD TP A$2.97(¥220) Some necessary knowledge gaps filled in. In light of the disappointing market reaction to its portfolio review last week, AMP has provided additional clarity on some key review details. The key positive, in our view, was greater disclosure of AMP’s excess capital level post the AMP Life transaction (A$755(¥83,050)m above management’s target surplus). This supports a commitment to return net cash proceeds to shareholders. While AMP aims to replace A$65(¥7,150)m of the A$80(¥8,800)m-A$90(¥9,900)m lost Wealth Management earnings from the transaction, we retain some skepticism if this can be achieved. We downgrade AMP FY18F/FY19 EPS by 1-4% but lift FY20F EPS by ~7%. Trading on 10x FY19F/FY20F PE AMP remains cheap, but risks are hard to quantify until impacts from the Royal Commission become clearer. HOLD.

Highlands Pacific (A$0.10(¥0)) ADD TP A$0.33(¥0) A Chinese puzzle. The Ramu nickel cobalt project (HIG 8.56% moving to 11.3%) in PNG reported a strong operational quarter, with ore processed and production of contained nickel and cobalt in the Mixed Hydroxide product (MHP) above nameplate capacity. The “streaming deal” between HIG and Cobalt 27 (KBLT.V) requires approval by the Ramu partners – the PNG government entity MRDC, and the project operator MCC. MRDC has confirmed its support for the deal. Ramu’s revenue was minimal as the renegotiation of expired sales contracts “took longer than expected”, and product shipments largely suspended for the Quarter. Sales and shipments resumed in October.

Resapp Health Ltd (A$0.12(¥0)) ADD TP A$0.24(¥0) Over reaction. RAP released its top-line results from its US SMARTCOUGH study, with positive results in the largest market indications for LRTI, URTI and asthma, and expects to lodge its FDA de novo application before year end. Clinical diagnosis in the US of respiratory disease proves to be highly variable with a third of tests requiring a third adjudicator to act as a tie-breaker. While disappointed that the pneumonia results fell short of the benchmark 70% PPA and NPA, we believe the market has overreacted considering the relatively small market size for this indication in the US. We have lowered our forecasts to reflect timing of telehealth revenue. The target price has been reduced to A$0.24(¥0) from A$0.35(¥0). Add recommendation maintained.

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Deutsche Bank Research

Newcrest Mining – Cadia site visit – plenty of time to pull the recovery levers – Ticker: NCM.AX, Closing Price: 20.76 AUD, Target Price: 23.00 AUD, Recommendation: Buy. We recently visited NCM’s Cadia mine near Orange, NSW. Over the last two years the operation has been impacted by a major seismic event and a tailings dam failure. Despite this NCM is progressing plans to enhance the operation over the c.50yr remaining mine life. Having such a long mine life lends itself to being able to problem solve issues and pull levers to deliver the highest value outcomes.

CSR – 1HFY19 preview: Alunorte progress & housing mix provide some +ve’s – Ticker: CSR.AX, Closing Price: 3.46 AUD, Target Price: 3.80 AUD, Recommendation: Hold. 1HFY19 result – DBe EBIT of $176(¥19,360)m – CSR reports its 1HFY19 result on Friday 2 November. We expect: 1) Building Products EBIT (including Viridian) to decline 3% yoy as sales and EBIT margin steadily decline with residential housing volumes (partially offset by improved performance from Viridian); 2) Aluminium EBIT of $25(¥2,750)m with earnings impacted by higher power costs; 3) Property EBIT of $41(¥4,510)m (includes $30(¥3,300)m EBIT from Horsley Park). Hold retained on valuation.

Paper & Packaging – Earnings estimates revised on new FX assumptions – Slightly negative for Amcor and Pact. Following changes to Deutsche Bank’s FX assumptions, we have reviewed our earnings estimates for the Paper & Packaging sector. The change to our FX assumptions are slightly negative for both Amcor (down 1% in FY19 but unchanged in FY20) and Pact Group (down 1%). Our valuation for Amcor remains $16.65(¥1,760)/share and our Pact Group valuation remains $5.80(¥550)/share. We have Buy ratings on Amcor and Pact Group, and a Hold rating on Orora.

Viva Energy Group – Refining volumes solid but margins weak- Ticker: VEA.AX, Closing Price: 2.15 AUD, Target Price: 2.65 AUD, Recommendation: Buy.
Solid refinery throughput in September but margin worse than expected – VEA released a Refining update for September. Crude Intake was 3.6MBBLs which follows on from the 3.1MMBBLs intake in August and 3.5MBBLs in July. This implies an average intake of 120kBBLs/ day which is pleasing given we believe there was some impact from the recent outage based on commentary that the refinery “returned to full production in early September”. The Geelong refining margin (pre energy costs) was US$8.1(¥880)/ BBL which is significantly below the US$11.1(¥1,210) achieved in August. This is partly the result of a lower Singapore benchmark margin (US$4.75(¥440) in September vs US$5.84(¥550) in August) but also a much smaller Geelong margin premium (US$3.35(¥330) vs US$5.26(¥550)). This dynamic is shown in Figure 1. Regional refining margins are currently tracking broadly in line with their long term average (refer Figure 2).

Morgans Research

Call to action – Lovisa Holdings Ltd. LOV’s trading update showed YTD LFL growth of -0.9% – reflecting the cycling of a strong comp stack over the last few years. Australia was the weakest region. The GM appears to have held up (ie at the cost of achieving better comps). LFL sales volatility/weakness is likely to persist over the balance of FY19, however we are more focused on LOV’s store rollout potential as the group’s key driver. We think CY19 will be the year LOV takes a more definitive stance on the pilot markets’ footprint potential, which have the potential to exceed our base forecasts. We upgrade to an Add. c46% of LOV’s capital is owned by the incoming Chairman and CEO – we are less concerned with short-term LFL sales blips in the context of the longer term global growth potential and note the growing cash position.

Overnight Highlights

US Market: A bounce back in trade-sensitive chipmakers pushed US stocks higher on Tuesday, after Washington cut off a Chinese semiconductor maker from its US suppliers.

European Market: European shares ended a choppy session lower on Tuesday, failing to benefit from a positive open on Wall Street as they buckled under the weight of disappointing earnings and data showing the euro zone economy grew less than expected in the third quarter.

Asian Market: Hong Kong’s main Hang Seng index closed at its lowest in nearly 18 months on Tuesday after a choppy day for regional markets, as tepid investor sentiment outweighed promises of support for mainland markets by China’s securities regulator.

Company Reports

Evolution Mining Ltd (A$3.07(¥330)) HOLD TP A$3.28(¥330) Profitable production and growth. Gold production for the September 2018 quarter was 200,218 oz (202,254 oz June quarter) at an All-in Sustaining Cost (AISC) of A$885(¥97,350)/oz ( A$846(¥93,060)/oz), and an All-in Cost (AIC includes on-going capex and discovery) of A$1,121(¥123,310)/oz (A$1,130(¥124,300)/oz). The average received gold price of A$1,662(¥182,820)/oz (A$1,675(¥184,250)/oz previously) generated Group operating mine cashflow of A$196.9(¥21,560)m (A$221.9(¥24,310)m previously). In line with policy, the final dividend of 4cps fully franked for FY 2017/18 was declared and paid in the September quarter (interim 3.5cps), reflecting 50% of EVN’s after tax earnings. At the flagship Cowal mine, work continued on the tails leach project and some high grade exploration success was reported. Regulatory approval to increase throughput by 31% was received after the end of the quarter.

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Deutsche Bank Research

Wesfarmers Ltd – Little Shop, big sales – Ticker: WES.AX, Closing Price: 47.33 AUD, Target Price: 48.00 AUD, Recommendation: Hold.
Sales were always going to be strong but seem to have normalised – Coles’ supermarket sales were always going to be strong given the benefits from 1) Little Shop; 2) free plastic bags; and 3) increased below the line Flybuys activity. LFL sales growth was 5.1% which was ahead of our estimate (DBe: 3.7%) but while not giving a trading update, the Coles CEO seemed to suggest the sales trend will moderate towards the levels seen at the end of 4Q18 (we est. c. 2.5% LFL). This is broadly in line with our channel checks which suggest that post Little Shop, Coles’ sales have slowed and Woolworths accelerated but the dynamic is not yet back to what it was in June.

Suncorp Group – Here comes the SUN – Ticker: SUN.AX, Closing Price: 13.59 AUD, Target Price: 15.10 AUD, Recommendation: Buy.
Pull back provides opportunity – The market correction has seen SUN significantly pull back from recent highs. The stock is now trading 15% below its pre-result high. The group has committed to returning $600(¥66,000)m of capital to shareholders via the sale of its Life business, we also expect the ordinary dividend to be lifted on improving earnings, and in FY19 the cost out program starts to deliver significant benefits. A simplified operating structure, strong market positions and capital return make SUN an attractive investment at current levels.

Viva Energy Group – Petroleum Statistics – August – Ticker: VEA.AX, Closing Price: 2.17 AUD, Target Price: 2.65 AUD, Recommendation: Buy.
High fuel prices impacting on petrol demand but more than offset by diesel/jet – The Australian Department of the Environment and Energy has released its Australian Petroleum statistics for August 2018. The charts below outline the key data points of relevance to the refiner marketers, covering total petroleum product volumes, volumes of Petrol, Diesel and Jet fuel as well as penetration of premium petrol. As fuel prices have increased, petrol volume has come under pressure, with volumes declining by c. 5% for the past three months. However, overall volumes of Petroleum products remain robust with volumes growing by c. 5%, driven by Diesel and Jet fuel. Penetration of premium Petrol is down from its peak in Jan 16 which corresponded to the trough in petrol prices, but the decline has been fairly modest to date.

Morgans Research

Call to action – Morgans QLD Conference – Key picks Morgans was pleased to host its 28th Annual Queensland Conference featuring 45 companies across a broad cross-section of the economy. This year’s presenters were broadly upbeat, with corporates cautiously optimistic about their growth outlook, although management teams continue to strike a balance between controlling costs and investing for growth. Common themes included: cost control initiatives; enhancing digital offerings; corporates seeking offshore expansion; and leveraging strong energy markets. We discuss our key conference picks in more detail and summarise the presentations from all the companies.

Overnight Highlights

US Market: US stocks ended lower in a choppy trading session on Monday as technology stocks were pressured by lingering worries over interest rates and corporate earnings. European Market: European stocks eked out slight gains, as investors weighed geopolitical tensions and looked ahead to U.S. earnings season, in the hopes that strong corporate results might provide the next positive leg for eurozone stocks. Asian Market: The Hong Kong stock market closed lower on Monday, weighed down by the falling mainland market and concerns over the US-China trade conflict continued to limit investors’ appetite.

Company Reports

Wesfarmers Limited (A$47.18(¥5,170)) HOLD TP A$48.40(¥5,280) Coles gets ready for demerger. Coles’ 1Q19 sales update was ahead of our expectations on the back of the highly successful ‘Coles Little Shop’ campaign, improved in-store execution and investments in flybuys promotions. The strong sales result however was offset by a number of additional costs. We reduce Coles’ FY19F EBIT by 1% to A$1(¥110),9m. Our forecasts for WES’s other divisions remain unchanged. We maintain a Hold rating on a lower A$.40 target price (from A$51.43(¥5,610)).

ERM Power Limited (A$1.62(¥110)) ADD TP A$2.05(¥220) Exit from the USA. EPW has netted 13 cps from the sale of its loss-making USA business. This is the key driver of the increase in our target price to $2.05(¥220)ps (~27% upside at present). Estimated dividend yield at current prices is ~8.6%, assuming dividends double as the cashflow used to support the USA losses is instead distributed to investors. The 1H19 result is likely to be a key event as clarity is provided on FY19 gross margins and the capital management framework postUS exit.

Orica Limited (A$16.40(¥1,760)) HOLD TP A$17.25(¥1,870) FY18 result preview. ORI reports its FY18 result on Friday 2 November. A weak result has been well guided to, although 2H18 trends should show a material improvement on the 1H18. We have made slight revisions to our forecasts for delays with Burrup’s ramp-up, tough operating conditions in Latin America and the turnaround at Minova is taking longer than expected. While FY18 should be as bad as it gets for ORI, we think its share price is reflecting a recovery given the company is trading on fair multiples in FY19 and FY20. We maintain a Hold rating with a new price target of A$17.25(¥1,870).

IRESS Limited (A$11.24(¥1,210)) ADD TP A$14.52(¥1,540). Recommendation upgrade Following a recent share price fall we upgrade our IRESS recommendation to BUY (was HOLD). While we expect the IRESS share price to remain volatile in the near term, driven by financial markets, we feel that the risk-reward trade-off is now more attractive. There are no changes to our forecasts, valuation or price target.

Cooper Energy Ltd (A$0.46(¥0)) ADD TP A$0.61(¥0). Eye on future growth Focus returning to growth, with COE outlining a clear focus on exploring two offshore prospects in the Otway and appraising deeper targets at Manta. Overall a steady 1Q19 result, with lower pcp production more than offset by the strong price environment. 1Q19 saw production -14% pcp with: 1) lower Casino-5 output (albeit recovering post April 2018 workover) and 2) on field decline in the Cooper Basin. Despite decreased volume, 1Q19 sales revenue jumped 7% to A$21.8(¥2,310)m (from A$20.4(¥2,200)m) with AUD oil price up 11% to A$113.65(¥12,430)/bbl. We maintain our Add rating on COE with an A$0.61(¥0)ps price target.

Otto Energy Limited (A$0.06(¥0)) ADD TP A$0.10(¥0). Eight more targets to come Not an ideal start to OEL’s exploration program, with BYE-operated Bivouac Peak and Hilcorp-operated Big Tex both proving non-commercial. We view the resulting share price sell off as leaving little value priced in for the remaining eight exploration targets, highlighting an opportunity. P&A of Bivouac Peak is cheaper than we expected, while lower capex on both prospects will have a positive impact on FY19 cash flow. Removing Bivouac Peak & Big Tex has reduced our valuation to A$0.101(¥0)ps. We maintain our Add rating on OEL, with a A$0.101(¥0)ps price target (was A$0.12(¥0)).

Praemium Limited (A$0.90(¥0)) ADD TP A$1.07(¥110). Tracking to schedule Praemium ended the September quarter with funds on platform of A$5.58(¥550)bn, up 29% yoy. While net inflows were a bit weaker than expected the company remains confident that inflows will improve in the next few quarters due to new customer signings. The company remains on track to meet our FY19 revenue and earnings forecasts. Our forecasts and price target of A$1.07(¥110) per share are unchanged. Our ADD recommendation is maintained.

Technically Speaking – WBC, CBA, ANZ, NAB, MQG. Westpac Banking Corp (WBC) – Short term bounce. Commonwealth Bank (CBA) – Short term bounce. ANZ Banking Group (ANZ) – Short term bounce. National Australia Bank (NAB) – Short term bounce. Macquarie Group (MQG) – Short term bounce.

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Deutsche Bank Research

Australian Banking Sector – The Bank Vault: Valuation charts -Bank sector – valuation metrics. Inside this week’s Bank Vault we highlight key bank valuation trends over the last month, and take a look at the week’s regulatory news. The major banks’ avg 12m fwd PER is currently 11.1x, which is 14% below the 5yr avg. On a relative basis, the majors on avg are trading at a ~19% discount to the 5yr avg PE rel vs All Industrials ex-Banks. WBC is trading at the largest discount to historical PE rel (21% below its 5-yr avg), while ANZ’s discount is the smallest (14%). The dispersion among the majors between the highest and lowest PERs is now at 1.2x, and remains significantly below the 5yr avg of ~2.2x.

Morgans Research

Call to action – Cybg PLC CYB has received IRB accreditation from the PRA for its Mortgage and SME/Corporate portfolios. Our underlying EPS forecasts have not changed as a result of this announcement. However, our FY19F underlying EPS is increased by 10% as we now allow for an earlier earnings contribution from Virgin Money.

Overnight Highlights
US Market: The US benchmark S&P 500 stock index snapped a six-day losing streak on Friday as technology stocks recovered after a week of losses, with investors looking for bargains ahead of the third quarter earnings reporting season. European Market: European stocks failed to stage a recovery on Friday, posting their worst week since a market correction last February as a new sell-off hit bourses across the globe, amid worries about protectionism and fast-rising US interest rates. Asian Market: The Hang Seng Index rose 2.1 per cent in Hong Kong, with Tencent Holdings posting its biggest gain since 2015 after sliding for a record 10 days. Shanghai’s benchmark reversed morning losses to close 0.9 per cent higher.

Company Reports

REA Group (A$75.50(¥8,250)) ADD TP A$92.02(¥10,120) Outlook trimmed. As a precautionary measure, we have lowered our REA forecasts following last week’s earnings warning from Domain. While REA is not immune from the drop in top-end residential listings volumes in Sydney and Melbourne that caused trouble for Domain, its business is more geographically diversified. In our view current for sale listings volumes are unsustainably low, but the timing of any return to normal volumes is difficult to call. Our valuation and price target fall to A$92.02(¥10,120) from A$95.21(¥10,450). In our view REA represents good value at current levels. We maintain an ADD recommendation.

Domain Holdings Aus (A$2.77(¥220)) REDUCE TP A$2.52(¥220) Caught in a downdraft. A downturn in residential ad volumes in NSW and Victoria caused Domain to downgrade market expectations for FY19, with Q1 revenue growth less than half market expectations. Domain is paying a heavy price for its over-exposure to NSW, where the drop off in ad volumes is more severe than in other states. We downgrade our profit forecasts to reflect the update. Our price target – set by our DCF valuation – drops to A$2.52(¥220) from A$2.81(¥220) per share. While listings volumes look unsustainably low, and should rebuild over time, short-term confidence in a turnaround may remain weak. We retain a REDUCE recommendation.

Japara Healthcare Lt (A$1.24(¥110)) HOLD TP A$1.35(¥110) Terms of reference are key. The terms of reference for the RC into aged care have now been set, with an interim report due by October 2019. We see the price range bound for 12 months. Higher wage costs, audit and compliance costs are likely across the sector and we have preemptively increased our cost by 1% across the forecast period. We have applied a discount to our valuation to reflect uncertainty around possible outcome of the RC. We retain a Hold recommendation.

Michael Hill Int (A$0.91(¥0)) REDUCE TP A$0.70(¥0) Trading update reveals a very weak 1Q. MHJ reported a very weak 1Q trading update, with group SSS -11% and all regions heavily negative. The performance was attributed to ‘under estimating marketing and promotional activities’. This is the softest comp sales performance we have seen from a retailer in a long time. Given MHJ is in a CEO transition phase (new CEO starts midNov), we are cautious on the viability of the current sales strategy and performance for the rest of FY19-onwards. We make material EPS downgrades (33-35%) across FY1921. Clearly MHJ’s share price will fall materially on the back of this update, and we are cognisant of not getting too negative at what could be a low point. However, the fact that all territories are so weak simultaneously is of real concern and the brand, earnings and operational uncertainty are too great for us to recommend holding the stock. We downgrade to Reduce with a revised target price of A$0.70(¥0).

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Ord Minnett Research

Deutsche Bank Research

South32 (S32) – aluminium advantage: Buy retained
S32 has 3.2mt of excess alumina that gets sold into the spot market. The Norsk Hydro news earlier in the week has tightened the market, and the 1.4mt aluminium deficit we forecast in 2019 could prove to be conservative. Not only is the spot alumina price going to help (every 10% increase is an 11% boost to S32 EBIT), S32 smelters in South Africa and Mozambique, often seen as marginal, should also benefit from an expected lift in LME pricing. The aluminium chain makes up 50% of James Gurry’s EBITDA forecasts for S32, based on $2385(¥262,350)/t aluminium and $420(¥46,200)/t alumina for 2019. Spot aluminium is $2167(¥238,370)/t and alumina $460(¥50,600)/t. James has S32 trading on 4x 2019 EV/EBITDA with the prospect of net cash being returned before year end even after recent acquisitions. Retain Buy

St Barbara (SBM) 1Q: Off to a clean start – Buy RETAINED
Tim Hoff has maintained his BUY call after a clean 1Q19 production of 98.6koz (DBe 100koz) and has lifted his forecast FY19 NPAT 6% due to lower costs at Gwalia. Tim highlights that although Gwalia production missed on tonnes Simberi made up for the missing ounces. Gwalia production of 62.7koz was lower than our 71koz forecast, likely due to lower mined tonnes while the PAF plant was being installed (SBM doesn’t pre-release tonnes milled). Grades fell 11% QoQ to 11.8g/t beating our estimate of 11g/t, which is a positive given guidance of 10.5g/t in FY19. At an annualised rate the operation is tracking at the mid-point of 245-260koz guidance (DBe 263koz). Simberi made up the missing ounces, producing 35.9koz (DBe 29koz) with a grade of 1.45g/t lifting 14% QoQ (DBe 1.25g/t). At an annualised rate of 143koz the operation exceeded its guidance range of 105-115koz. Encouragingly SBM have maintained group guidance of 350-375koz (DBe 385koz). Cash of A$350(¥38,500)m was higher than our A$340(¥37,400)m estimate, largely due to the dividend reinvestment plan where A$14(¥1,540)m of the A$42(¥4,620)m was reinvested. At current prices SBM is trading at 0.84x P/NPV, and Tim has maintained BUY on valuation with a target price of A$4.20(¥440).

Bank of Queensland (BOQ) – Stronger than it was: Hold retained
Anthony Hoo was pleasantly surprised at yesterday’s BOQ result, as 2H numbers were stronger at the bottom line than he expected. The stock traded up as investors liked the margin outcome of 1.98%, vs Anthony at 1.94%. Even after excluding one off benefits of 2bps, the underlying NIM was stronger than Anthony was forecasting. However, it was not all good news, as BOQ experienced a 7% hoh decline in other operating income, as well as significant below the line write-offs. BOQ’s capital position came in slightly below our forecasts but it remains in a comfortable range and is a key attraction for the stock. Other positives were asset quality, which remained sound; impaired balances down 5% hoh and the mortgage portfolio saw a small 1bp reduction in 90 days past due. Anthony retains his HOLD and $11.00(¥1,210) price target.

US Building Materials – Recent news
Lee Power retains his BUY rating on JHX following its US peer’s(Lennar) Q3 result. Lee notes that order growth was slightly below guidance for Lennar, but Lennar management suggested that underlying fundamentals that support a healthy housing mkt (low unemployment, consumer confidence etc) should continue to support growth longer term. Turning back to JHX, and Lee believes he has factored in enough risk to any short term drop in order growth. Lee’s thoughts are in line with Lennar management, in that the LT growth drivers remain in tack. Lee also retains a $23.60(¥2,530) Target Price. And it was also reassuring to hear the feedback from Nishu Sood and team post the DB Annual Bank Leverage Conference earlier this week. Nishu met with 12 building sector companies, and there was a similar theme mentioned of a short term pullback. Reasons to be more optimistic in the medium to long term included a pullback in lumber prices, better weather, and a less competitive mkt in cement.

Morgans Research

Call to action – High Conviction Stocks – October We currently expect the S&P/ASX200 index to finish the year at 6,300 but the outlook particularly this late in a sustained business cycle is becoming more vulnerable given the prevailing macro-economic risks. Equity market valuations remain stretched and measures of market volatility remain close to all-time lows. We continue to caution investors against complacency and note that avoiding loss is just as important as achieving profits in the current market. We recently highlighted 28 sell or switch ideas that are either vulnerable to ongoing disappointment, worthy of switching on valuation grounds, or worthy of switching into more preferred names in the sector. We add Reliance Worldwide and remove Atlas Arteria this month. Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures. Also, we recently nominated 28 stocks (Reporting Season Review) that we believe offer compelling upside post-results.

Overnight Highlights

US Market: US stocks slumped as a rise in US Treasury yields to multiyear highs reverberated around the world. European Market: Britain’s top share index suffered its biggest loss since mid-August as rising US yields took their toll with the greatest impact seen across the defensive consumer staples sector. Asian Market: A quiet start turned into a rough day for Asian equities, with the overnight jump in global bond yields and the dollar on strong US jobs data raising concerns about the region.

Company Reports

Bank of Queensland (A$11.01(¥1,210)) ADD TP A$11.30(¥1,210). No growth on the horizon BOQ has announced FY18 cash earnings of $372(¥40,920)m, 2.7% better than our forecast. A final ordinary dividend of 38cps fully franked has been declared. No special dividend has been declared contrary to our expectations. We continue to not foresee any cash EPS growth for BOQ over our forecast period. The dividend yield on offer is the key positive in our investment thesis. A plan to accelerate investment spend has been announced in line with our expectations. Click here for more… Technically Speaking – RWC, RSG, PRU, PAR, RIC Reliance Worldwide (RWC) – Double Blessed Buy. Resolute Mining (RSG) – Tactical Buy. Perseus Mining (PRU) – Bullish breakout. Paradigm Biopharmaceuticals (PAR) – Deterioration in momentum. Ridley Corporation (RIC) – Trim.

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Morgans Research

Call to action – Australia Strategy – Refundable franking credits and retirees Labor’s proposal to scrap cash refunds of surplus franking credits has created unwanted angst for affected retirees. Public debate is intensifying as these retirees point out that this proposal adversely affects their long term retirement planning. Retirement savings decisions have accounted for franking refunds as an established feature of our tax system, which are therefore core to the financial security of retirees. We explain why Labor’s proposed changes to franking are not a given and why it is premature to alter investment strategies at this time. However it is important to stay informed about how potential changes may affect you. It’s also critical for retirees to have their say on the issue.

Overnight Highlights

US Market: Wall Street advanced on Wednesday and the Dow Jones Industrial Average closed at a record for a second day, after US economic data fuelled a rise in Treasury yields, lifting financial stocks. European Market: Italian stocks turned as signs the government would target a lower budget deficit quelled investors’ fears of a damaging showdown with the European Commission. Asian Market: Japanese stocks fell on Wednesday as auto makers skidded on a sharp decline in US new car sales last month while other shares, including financials, retreated after a rally over recent weeks.

Company Reports

Genex Power Ltd (A$0.29(¥0)) ADD TP A$0.36(¥0) Smart and simple storage. We initiate coverage of GNX with an ADD rating and a 36cps price target. We expect the share price to reflect our valuation as the unique Kidston Pumped Hydro project details are announced and the project is delivered. Given the large amount of government support our view is that the project will proceed and will be able to secure an offtake contract of at least 10 years at a 10% premium to historical prices for storage with prices rising further following the roll off of the initial contract. The immediate catalysts are the detailed announcement and then delivery of Kidston Stage 2 (pumped hydro and solar) but investors should be aware that sustainable dividends from this project will be many years away as project finance repayments absorb most of the free cashflow in the medium term.

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Morgans Research

Call to action – High Conviction Stocks – October We currently expect the S&P/ASX200 index to finish the year at 6,300 but the outlook particularly this late in a sustained business cycle is becoming more vulnerable given the prevailing macro-economic risks. Equity market valuations remain stretched and measures of market volatility remain close to all-time lows. We continue to caution investors against complacency and note that avoiding loss is just as important as achieving profits in the current market. We recently highlighted 28 sell or switch ideas that are either vulnerable to ongoing disappointment, worthy of switching on valuation grounds, or worthy of switching into more preferred names in the sector. We add Reliance Worldwide and remove Atlas Arteria this month. Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures. Also, we recently nominated 28 stocks (Reporting Season Review) that we believe offer compelling upside post-results.

Overnight Highlights

US Market: The Dow hit a record closing high, but another drop in Facebook shares weighed on both the S&P 500 and Nasdaq, driving both to finish in the red. European Market: British shares retreated as the positive impact of a new North American free trade pact faded globally and shares of Royal Mail hit a record low the day after the 500-year-old postal service issued a profit warning Asian Market: Hong Kong’s main Hang Seng index closed at a two-week low, dragged by financial and property stocks, while China’s H-shares index fell most in more than three months amid signs of weakness in China’s manufacturing sector.

Company Reports

Technically Speaking – STO, BHP, WPL, CWN, SKI Santos (STO) – Target reached. BHP Billiton (BHP) – Approaching resistance. Woodside Petroleum (WPL) – Overbought. Crown Resorts (CWN) – Heading higher. Spark Infrastructure (SKI) – Tactical Buy.

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Deutsche Bank

Westpac Alert – Legal and remediation costs to impact FY18 result – Ticker: WBC.AX, Closing Price: 27.81 AUD, Target Price: 31.00 AUD, Recommendation: Buy.
$235(¥25,850)m profit impact on FY18 from refunds and litigation provisions – After the market close today, WBC announced it expects an impact of $235(¥25,850)m (post-tax) on its FY18 result due to customer refunds as well as provisions for recent litigation. The remediation costs relate to the financial advice business and were not unexpected, given recent revelations at the royal commission. We anticipate customer remediation costs won’t be a confined issue, and is likely to impact peers as well given that multiple case studies at the royal commission highlighted problems across the advice sector such as ‘fees for no service’ and inappropriate advice. More broadly, this is likely a harbinger of further legal and remediation costs for the banks in the near term post the royal commission. We have reduced our FY18 NPAT forecast by 2.7% as a result of today’s disclosure.

Viva Energy Group Alert – Some welcome good news from Geelong – Ticker: VEA.AX, Closing Price: 2.29 AUD, Target Price: 2.65 AUD, Recommendation: Buy.
August was a good month for the refinery given the unplanned outage – We don’t want to get into the habit of focusing too heavily on month-by-month refinery margins but the August Refinery performance was much better than we feared given the unplanned outage. Throughput was relatively strong, suggesting the Refinery was performing very well prior to the outage and the margin was high. This is a pleasing outcome given our concerns margins could have been impacted by the progressive restoration of the refinery. There is still downside risk to 2H Prospectus Refinery earnings given the outage and weak Sing margins in July but the current throughput and margin premium run-rates are ahead of our below-prospectus forecasts.

Syrah Resources – Balama ramp up risks continue – Ticker: SYR.AX, Closing Price: 2.35 AUD, Target Price: 2.70 AUD, Recommendation: Hold.
Production downgrade we expected but from an issue SYR should have anticipated – SYR had advised the market that September production at Balama has been impacted by the delay in sourcing and fitting filter cloths (a routine consumable) and it now expects to produce 15kt vs. previously guided 18kt. It has guided the market to a Sept Q production forecast of 39-40kt which is in line with our expectations of 39.6kt. The delay doesn’t impact our valuation however highlights the continuing risk of ramp up at the Balama operation. We expect Balama to miss its full year guidance of 135-145kt, producing 128kt. This is still some way off a nameplate run rate of 350ktpa (CY19 guidance 250-300kt) and so there remains the risk of delays to the ramp up and commissioning (DBe 270kt in CY19).

Gold Industry – Denver Gold Forum – sector waiting for a spark, merger provides optimism – Barrick-Randgold deal and potential for further news flow the main talking point – We attended the Denver Gold Forum along with a mix of companies, sell-side and buy-side participants (over 1,200 participants overall). In general, sentiment for the sector has been weak with a lack of conviction on the gold price and also companies are largely without stock specific catalysts. However, the Barrick announcement could be the start of some improved interest with likely asset sales to follow from the deal and potential for other companies to consolidate in our view which would be good for the sector. We see room for greater efficiencies in the sector through combining businesses and rationalizing weaker assets. We are generally neutral-to-slightly negative on the direction of the gold price based on the current macro conditions; however, a change in equity market sentiment, geopolitical conditions or a slowdown in global growth could all signal a turning point with potential greater interest in gold equities for diversification/value vs other sectors. We have a Buy on Newcrest for ASX100 golds (large long life assets with production growth over the next two years) and a Buy on Dacian (developer ramping up Mt Morgans asset with exploration upside) for the juniors.

Treasury Wine Estates Alert – ACCC to investigate the wine grape industry – Ticker: TWE.AX, Closing Price: 17.62 AUD, Target Price: 18.00 AUD, Recommendation: Hold.
ACCC to conduct a market study of the wine grape industry – The ACCC has announced a market study of the Australian wine grape industry. The purpose is to complete an in-depth review of the industry and identify any market failures or trade practices issues that may be preventing the functioning of competitive markets, adversely affecting grape growers. Draft findings are expected in Mar 19, with a final report expected in June 19.

Whitehaven Coal – Company engagement – Ticker: WHC.AX, Closing Price: 5.30 AUD, Target Price: 5.70 AUD, Recommendation: Buy.
We attended a group meeting with the board, our 3 key takeaways being:
§ Conservatism on capital allocation
§ Confidence in the long-term production plan
§ Open to growth options at a reasonable price.

Nufarm – FY18 result 4% below market; $303(¥33,330)m entitlement offer – Ticker: NUF.AX, Closing Price: 6.70 AUD, Target Price: 6.10 AUD, Recommendation: Sell. Valuation reduced 5% to $6.10(¥660)/share; Sell rating maintained – We believe there are still inherent earnings risks as evidenced by the greater skew to the second half (76% vs the expected 65-70%), the ongoing drought in Australia, the recent European acquisitions, higher raw material costs, volatility in Brazil and Argentina, US tariffs, and Brexit. With Sumitomo once again not taking up its entitlement in the $303(¥33,330)m equity raising, this could create a share overhang. We maintain our Sell rating with the stock trading at a 10% premium to our revised valuation of $6.10(¥660)/share and at 17.4x FY19e earnings.

Medibank Private – Market share wins can offset price cap – Ticker: MPL.AX, Closing Price: 2.92 AUD, Target Price: 3.40 AUD, Recommendation: Buy.
A 2% price cap is bad for PHI, but MPL can deal with the impact – In this note we look at the impact of a 2% price cap on our revenue assumptions for Medibank. We believe a 2% price growth cap for two years would have a negative impact on overall premium revenue for the industry. However, if MPL can continue its recent market share wins, and add 30k new customers a year for the next 3 years, on an existing customer base of 1.8 million policyholders, we believe it can offset the top line impact.

Orica Ltd Alert – Resignation of CFO – Ticker: ORI.AX, Closing Price: 17.15 AUD, Target Price: 17.00 AUD, Recommendation: Hold.
DB View – Vince Nicoletti is departing Orica for personal reasons and he will be replaced by Chris Davis from 1 October 2018. Chris joined Orica in 2013 and he has been the VP Group Finance since 2015. Prior to that, Chris was with Anglo American Group for 12 years, most recently as CEO of its subsidiary Scaw Metals Group. Vince Nicoletti was CFO for just 12 months. In 1H18, net operating cashflow was down 82% to $28.5(¥3,080)m with cash conversion declining to 37%. While we expect some improvement in the second half, we believe it will still be well below the company’s target level of 80%. The company reiterated its confidence in the outlook for FY18. We maintain our Hold rating on Orica with the stock trading at a 1% premium to our valuation of $17.00(¥1,870)/share and at 18.1x FY19e earnings.

Viva Energy Group – VEA liable for $31.2(¥3,410)m assessment – Ticker: VEA.AX, Closing Price: 2.34 AUD, Target Price: 2.65 AUD, Recommendation: Buy.
$31.2(¥3,410)m notice of assessment received from State Revenue Office of Victoria – Viva Energy Group announced today that it has been notified by Viva Energy REIT (VVR) of an assessment from the SRO for an amount of $31.2(¥3,410)m, relating to the transfer of properties shortly prior to the Viva Energy REIT IPO. Viva Energy Group is liable for this amount under the initial arrangements made between the Group and the REIT. Notably, the VEA prospectus commented that “Viva Energy remains liable to reimburse Viva Energy REIT for certain kinds of transaction costs that are incurred by Viva Energy REIT in connection with its establishment and ASX listing and which include stamp duty costs associated with the transfer of properties to Viva Energy REIT at that time”. The Group has stated that is does not agree with the SRO’s position and that it will lodge an objection to the Commissioner of State Revenue. In the case of an unfavourable outcome for the Group, the assessed amount will be recognised as a significant one-off item which will have an offsetting tax benefit due to a decrease in the initial capital gain recognised on the REIT’s IPO.

Morgans Research

Call to action – Westpac Banking Corp While WBC has announced increased provisions related to customer remediation and recent litigation, we view the magnitude of provisions as low compared to the extent of negativity baked into the share price. From our perspective, the main outstanding area of addressing customer issues for WBC now relates to its aligned financial planners. WBC remains our preferred major bank.

Overnight Highlights
US Market: US stocks rose, boosted by Apple and other FAANG shares as well as the Federal Reserve’s confidence in the strength of the economy. European Market: European shares rose slightly, reversing initial losses, as anxiety over political stability in Italy appeared to ease just hours before a cabinet meeting to set budget targets. Asian Market: Shares in Hong Kong closed lower after Hong Kong raised its base rate, prompting commercial banks to lift their benchmark rates for the first time in 12 years, and as new data showed slowing industrial profit growth in China.

Company Reports
Acrow Formwork (A$0.52(¥0)) ADD TP A$0.61(¥0) A closer look at Natform. In this note we take a closer look at the Natform acquisition and the potential opportunities that could arise for ACF in the long term. Natform has strong engineering capability and its screen systems complement ACF’s existing formwork and scaffolding rental offering. Although hard to quantify, the acquisition has the potential to deliver material revenue synergies over time. Despite strong share price appreciation over the past six months, ACF is still only trading on 8.7x FY19F PE and 3.7% yield. We therefore believe the stock remains an attractive investment proposition and maintain our Add rating.

Nufarm Limited (A$6.70(¥660)) HOLD TP A$6.85(¥660) FY18 – as bad as it gets In FY18, NUF experienced challenging seasonal conditions in most regions, a plant shutdown, a product ban and adverse FX. Drought and late seasons also severely impacted cashflow. To restore its balance sheet and to fund new growth initiatives, NUF has announced a A$303(¥33,330)m entitlement offer at A$5.85(¥550). FY19 guidance for 30-37% EBITDA growth was in line with expectations however it was highly qualified and earnings certainty is low at this point in the year. We move to a Hold rating given our new valuation is in line with the current share price however we recommend shareholders take up their entitlement offer.

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